TIP762: 10 Lessons From Investing Legends w/ Kyle Grieve

22:53Now we've already covered Alphabet, so I'm not going to go over it again. Salesforce and Adobe are actually pretty interesting. So looking at the 10-year keggers for Salesforce first, revenues 27%, EPS 28%, and free cash flow 31%. They have no debt either, and they're led still by their founder, Mark Benioff. Adobe is buying back shares, has a 10-year kegger of 13 % revenue growth and 14 % earnings per share. So out of those two, I like the growth of a business like Salesforce, but I will admit that I just don't know that much about the company. Perhaps I should put it on the wait list. However, before I would ever decide to invest in a business like Salesforce, I'd have to conduct pretty extensive research and due diligence.

23:32Which brings us to our next investor, whom I consider to be just the master of that area. And that person is Philip Fisher. So he wrote the excellent book, Common Stocks and Uncommon Profits, which I discussed in a lot of detail on TIP 646. And one of my biggest lessons from Mr. Fisher regards the power of Scuttlebutt. So Scuttlebutt is just one of the most potent ways that investors can gain an information edge. Scuttlebutt is simply learning more about a specific business by using alternative sources of information. Everyone has access to things such as a company's public documents. Therefore, reading them or other easily accessible information on the internet won't provide you an informational edge.

24:11It's definitely required, but again, it won't provide you an edge. But if you speak to other people who are involved in the business, the industry, or even the company, you know, the competition of the business, you can learn a heck of a lot. So in the book, The Sleuth Investor, the author discusses examining three different parties to sleuth within a company. They are customers, employees, and suppliers. So I'll zero in on customers here because I think that's the most critical area to look at. So when it comes to customers, there are three specific types to consider. There's the end user, there's the person who decides whether to sign a check so to purchase a product, and then there's the check signers themselves.

24:48You can also look at things like current customers, former customers, and potential customers. Speaking to any of these people will yield very high value information about the relationships that customers have with the business. The primary purpose of Scuttlebutt is to gather non-financial information about a business. So it enables you to learn about factors such as competitive advantages, management quality, growth prospects, and potential risks. Other great people that would be interesting to talk to would be suppliers who can just reveal the company's bargaining power, payment reputation, and reliability.

25:19You can talk to competitors who are often the best critics as they have no problem highlighting where a company is going to be strong or weak. You can talk to employees, current or former, which can provide incredibly valuable insights into things like culture, management effectiveness, and innovation. And then lastly, people like industry experts who can offer a lot of context about trends, regulation, and market dynamics. So I try to stay informed about all of the businesses that I own, but I must admit that it's pretty challenging. A CEO of a company is likely to know who all of their customers are, but they're very unlikely to share that information as that's an action that's frowned upon.

25:56Suppliers can also be very tough to find simply because it's not obvious who the suppliers are for a specific company. Competitors are probably the easiest to figure out because anyone involved in the business won't have a problem sharing that information with you. When you look at current employees, personally, I find it nearly impossible in my experience. people just don't seem to want to speak about their own business, probably just to avoid getting into any trouble. Industry experts are not hard to get information from either. So industry experts can be found just all over the internet, but you have to understand some of the incentives of the industry experts.

26:28Generally speaking, they're incentivized to talk up the industry. So if you find one to talk, remember that very, very closely. I recall finding a coal expert who was widely available on the internet. Guy was all over YouTube and podcasts. And while he always appeared to be very thoughtful. Given his various positions within the industry in terms of investments, it was evident that talking up the commodity was in his best interest. So our next lesson comes from Sir John Templeton, and that's to fish where there's just no fishermen. My idea came from this when reading the book, The John Templeton Way.

26:58So Templeton began investing in Japan in the 1950s, nearly three decades before the major bubble began to form. And he was investing in Japan during a time when just nobody was willing to touch Japanese stocks with a 10-foot pole. But John saw incredible value at this time. So in the early 1960s, the Japanese economy was growing at an average of 10%, and the US economy was growing at an average rate of only 4%. In other words, the Japanese economy was expanding two and a half times faster than the US economy. But many stocks in Japan cost 80 % less than the average of the stocks in the United States.

27:30So in a written report in 1960, there were two reasons why foreign investors refused to invest in Japan, despite these cheap valuations. The first one was that there was too many fluctuations in the stock price. And the second was that there just wasn't enough information. So this really got me thinking, you know, where could other investors in today's markets find areas of the market that have large amounts of volatility and lack information? And if you look hard enough, there's always areas of the market like this. My personal choice has been microcaps. Instead of looking at the massive US market, I stick with my home country, Canada.

28:02And in Canada, specifically, I look at microcaps. So whenever I'm speaking with members of the TIP mastermind community, they often ask about microcaps and how I research them. And it's ironic because one of the main impediments I hear from people is that they specifically don't research microcaps specifically because there's a lot less information out there on them. So if you look at the popular news or, you know, analysis sites such as Seeking Alpha, you're going to be very disappointed at what you find when trying to research microcaps. And that's because barely any analysts cover microcaps because they know that funds or their readers just can't or don't want to buy them.

28:37So that is why when you look at a

28:39Preston Pysh:business such as Alphabet or Amazon, you're never going to learn new analysis, which can help inform you and give you an edge over others. But the problem with investing this way is that you're investing in very well-known businesses and there's just less inefficiencies. I'm never going to say that there aren't inefficiencies in large and mega caps. Consider Meta for further proof of that. But I will say that there are areas of the market where there's just these massive inefficiencies and they occur a lot more often. And in my opinion, the part of the market that I think I can understand that is regularly inefficiently priced are microcaps.

29:15This is also backed by research. In the book, What Works on Wall Street by James O'Shaughnessy, he writes, between 1964 and 2009, if as a CompuStat scenario one illustrates, you required stock prices greater than a dollar, but put no return limit and allowed for stocks with missing data to be included, then the portfolio earned an average compounded annual return of 28%. Yet when you require that all stocks have share prices of greater than a dollar and have no missing return data and have limited monthly return to any security to 2000 % per month, as we see with scenario two, returns declined by approximately 10 % and the portfolio earns an average compounded return of 18.2%.

29:57So this second number, even though it's obviously a lot lower than the first one, was way higher than other market cap deciles. Now, I'm sure that some investors have identified other maybe rare aspects of the market that are inefficient to exploit. And if you look close enough, long enough, you're probably going to find areas that you can find very easy to understand, but might not be understandable by the average investor. And that's an area that you could exploit. So the key is really in understanding where to fish, where there are no fishermen. There's four of them. So the first one is to find areas of the market where information is just hard to find.

30:30The second is that the higher the volatility, the better. The third is that if you can't find any analysis, you're probably on the right path. And fourth, try to find a community of people who specifically try to exploit some of these mispricings. Today, there's tons of communities out there that specialize in pretty much anything that you're interested in. If you can find and get access to those communities, you can usually access pretty small groups of people trying to find inefficiencies in the market together. John Templeton in his time just didn't have access to this, so he had to do it all by himself.

31:01I can reach out to many, many people to find interesting ideas in microcaps. And since there's just so many ideas, the idea flow just never really ends. The interesting thing about inefficiencies is that they rarely last. Microcaps tend to grow through cycles of popularity and unpopularity. In Templeton's case, once the rest of the world started catching on to just how much of a bargain Japanese stocks were, they began bidding up the prices, which removed that inefficiency. But by that point, Templeton was long gone. So if you exploit inefficiencies, you must keep your ear to the ground to observe, you know, when they are disappearing.

31:36Otherwise, you risk holding the bag. And if you're holding the bag, you either break even if you had the right entry point, you lose money if the cycle goes down more than you thought, or you have to wait a multi-year time period until that cycle changes to make a profit. Now, the next investor I want to highlight is John Neff, who I just released an episode about on TIP 747. One of my favorite aspects of John Neff was that he was an investor with a very value-based approach, but he also wasn't afraid to buy businesses that I think most traditional value investors wouldn't touch. So Neff considered himself a low PE investor, and that's definitely where the bulk of his money was made.

32:14However, he also understood that flexibility was just crucial to achieving superior long-term returns. He owned names like Home Depot that traded over 20 times earnings and even owned names like IBM, Xerox, and Intel during the latter part of the nifty 50 years. So Neff wasn't afraid to take positions in businesses where he found value. Now, this is a valuable principle to consider for investors who might limit themselves to a single investing strategy. If you're only looking at businesses with single digit PEs, for instance, there will be boom and bust periods in your opportunity set. And it's totally okay to invest that way.

32:51People like Bob Robotti have made a career out of investing in this manner. However, I think you really broaden your horizons if you view value the way that Neff did. And that's to find undervalue assets rather than focusing exclusively on low PE. And this is a lesson that I've tracked for nearly my entire investing career. While I do enjoy investing in stocks with single digit PEs, I'm also attracted to businesses that might have a PE that exceeds 30, but for good reason. Some businesses are just so exceptional and resilient that they simply deserve to be priced higher than a lower quality alternative.

33:25You know, a sticky SaaS business that is growing its recurring revenue at 30 % per year and has nearly all of its revenue as recurring revenue deserves a premium versus a cigar butt that is trading, you know, cheap based on its assets. So let's dive into this topic in some more detail. So let's make up a hypothetical cigar bar business. We're going to call it ugly duckling, or just ugly for short. So ugly is a discount shoe retailer that buys leftover inventory from failed brands and resells it in outlet style stores. So it's competitive advantage is just, it's cheap. And it has no loyal customers.

34:00It's got no in-house brand. Sales are lumpy and completely unpredictable. Since the business is a low cost provider, its gross margins typically range in the 15 to 20 % range. But the company is struggling to grow because its operating results just aren't strong and banks are very hesitant to lend it any money. Going to the capital markets is an option, but their growth prospects are so dire that it just might not work out the way management wants. However, if you examine the balance sheet, they don't require much debt to operate. They own a significant amount of their stores and they have substantial amounts of inventory.

34:31So if you were to look at this on a balance cheap basis as maybe a liquidation play, you would make money just by selling all the business's assets rather than keeping the business running. So what's a business like this worth? It might trade at five times earnings, attracting value investors to the company. Perhaps the catalyst would just be some sort of liquidation event of the entire business. Or maybe a new leadership could come in and improve the business and identify new ways to expand. The point is the business is cheap and I think kind of deserves to be. Could this business be worth 10 times earnings, resulting in a double if they maybe strung together a few good quarters?

35:04I doubt it. Let's look at a business we'll call CloudNest. So this business is a cloud-based collaboration software for small businesses. Customers pay a yearly fee for project management, file sharing, and communication. The business has 95 % of its customers on multi-year contracts. Revenue is about as predictable as the sun rising and setting, and gross margins are 75 % and climbing as the business onboards new customers and test out its pricing power. Customers are extremely loyal with retention rates of about 98%. The market is just massive as they've only penetrated about 1 % of small businesses in North America.

35:39Additionally, the company is developing new modules that current customers are willing to pay more for as they expand their offerings. The business is hugely profitable, boasting 25 % net margins, and net income has grown at a 30 % kegger for the last three years, showing no signs of slowing down. Now, do you think CloudNest has any business trading at a five times earning multiple, 10 times seems like an absolute steal. Heck, a business like this trading at 20 times its value could still yield excellent results if it can continue growing at those rates while improving its margins. So let's say this business can continue growing that income at 30 % for the next three years.

36:13That means EPS will more than double over a three-year period. So if you bought it at 20 times earnings, your investment should double with absolutely no multiple expansion needed. However, business like this can easily justify 30 or 40 times earnings. That would add a substantial amount to the investment. This is why growth should be factored into any investment and reflected in its stock price. Now, let's move on here and imagine that the year is 1999 and Howard Marks is at a quiet dinner in midtown Manhattan. The Nasdaq has just tripled in the last three years and the air is just thick with the optimism of innovative technology.

36:49Everyone at Howard's table is eagerly discussing dot-com stocks, young billionaire founders, fast-moving IPOs, and the fortunes that were made in a matter of weeks. Someone leans over to Marks and asks, Howard, may I ask what your hottest tech pick is right now? Marks slowly smiles, shrugs, and says, none. It's a baffling response. To most people in the room, not owning dot com stocks is complete madness. But this is why Marks has been so successful for so long. He doesn't think like everyone else. Instead of asking what everyone else was asking, which was, what stock should I buy that will continue going up in price.

37:26He was asking what happens when everyone else buys a

37:28Preston Pysh:stock and I don't. So the question everyone else was asking is an example of first order thinking. It's a simple and direct way of thinking. Most people concluded that companies growing rapidly in terms of revenue or those even with just an idea that revenue would increase in the future were the ones that were becoming these market darlings. Therefore, they were the ones that people should buy. But second order thinking is much more complex and requires more mental energy. Marx would look at the problem this way. Since everyone knows the company is growing fast, there will be significant buying pressure.

38:01As buying pressure increases, the stock price will rise. So the question wasn't, is the company any good? It was, what is the best decision to make, knowing that everyone is piling into the stock? Marx wasn't looking at the surface question. He was peering and looking at an extra layer deeper. Examining factors such as the expectations, embedded in the stock price, which gave him a much more accurate view of the market's psychology. Let's now look back even further and go back to the mid-1800s, when thousands of people rushed to California to live out the American dream by finding a very precious resource, gold.

38:37So Americans headed to California in droves, carrying pickaxes and shovels. And they did this with visions of glittering fortunes. They were thinking in the purest form of first-order logic. Gold is valuable. Go to where the gold is and find it yourself. Now in 1853, a Bavarian immigrant arrived in San Francisco. His name was Levi Strauss. Instead of thinking about gold like everybody else, he noticed a need that was missing for all gold diggers. This was a pair of just good pants that wouldn't rip after a few days or weeks after digging. Instead of joining the gold finding frenzy, he decided to make his fortune by supplying the prospectors with just strong pants that could withstand a lot of punishment.

39:19And this is how Levi's genes was born. So Levi Strauss was thinking in the second order. And instead of taking the risk of finding gold or just going completely broke like many people did, he simply just supplied the diggers with the equipment they needed to attempt to find their own riches. And in the process, he built an incredible business that remains in existence today, 172 years later. Now we get back to Marx. So the people at his dinner most likely ignored his comment. They went all in on the dot-com bubble. And a year later, many of these people were seeking a new career or employer as their funds and fortunes had evaporated.

39:55Marx, by contrast, would continue to compound his investors' capital successfully for many more decades. And Marx did this by investing in the less obvious deals that everyone on the street didn't love. And that's really the lesson in Mark's brilliance. Don't just ask what will happen, but continue to ask what will happen after that. Just do that for a few decades and you're bound to find some incredible investments with just large margins of safety and a more than adequate upside. So my favorite use case for this is determining whether I'd be taking too much risk by buying an investment at a given price.

40:28So purchasing an expensive business means the business is just priced for perfection. And when a company is priced that way, it must continue to meet sky high expectations. The problem with this line of thinking is that businesses will stumble. You know, regulators will get in the way, the economy will throw a curveball, or management will face some sort of crisis. So I like using second order thinking to determine if a business's expectations are set correctly. Poor quality businesses are likely to fail to meet expectations. High quality businesses tend to beat expectations alarmingly regularly.

41:00I also employ second-order thinking to observe enterprises that don't meet expectations in the short term, but are likely to improve in the long run. Next, we encounter two exceptional investors in Nick Sleep and Kay Zakaria, who founded the Nomad Investment Partnership. These two made an investing career out of riding just three key stocks and doing as little tinkering as possible while holding them. And the lesson here is simple, but not easy to put in practice. And that's to treat your winners as businesses that you keep, not ones that you trade in and out of. And these aren't investments you just look to, you know, double your money, then run to the next idea.

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44:33Whether you're a fast-growing startup or a global enterprise, Vanta is here to help you automate your security and compliance and earn, improve trust. Get started today at vanta.com slash T-I-P. That's V-A-N-T-A dot com slash T-I-P. All right, back to the show. Sleep and Zakaria spent their entire investing career looking for a very specific business model. These were what was called scale economies shared. It states that when a business grows, it passes on its scale benefits to its customers rather than retaining them for their own use. The three businesses that they wrote were Berkshire Hathaway, Costco, and Amazon.

45:15Now, I've tried to grasp whether this is a business template that appeals to me, and I concluded that I would never say no to a business model like that, but I'm also not going to go out of my way to exclusively search for business models that fit the scale economy shared model that Nomad was obsessed with. Instead, I search for businesses that I can ride for hopefully multi-year and maybe even multi-decade time periods, and businesses that are likely to just increase in intrinsic value over my holding period. This is what Sleep and Zacario were trying to do. They basically whittled down all of their decisions to these three stocks that I just listed.

45:51And the stocks were just so good that they were able to extend their holding periods for longer and longer periods of time. And even since they closed their fund in 2014, they still hold the vast majority of their net worth in these three names. But they didn't reach this conclusion overnight. They invested in other businesses that even shared the same business model, but didn't quite make the cut. So there are other companies, AirAsia, Carpetrite, ASOS, that were in the portfolio at one point, along with several other classic value investments trading at a fraction of liquidation value. But over time, Sleep and Zakari observed that the businesses that were at the top of the rung, even within the ultra-specific business model, were the ones that deserved most of their capital.

46:32I enjoy reviewing my top three businesses and noting if they exhibit any specific characteristics. So my top three positions make up 42 % of my portfolio. And to be honest, they don't really share a business model between the three. And I'm perfectly fine with that. So even though I find Nomad's approach interesting, it's not the actual business model that taught me the most significant lesson. It's simply to find businesses that you can ride for extended periods of time and make sure to hold them as long as they continue to perform well. And in that sense, yes, I think I'm doing that pretty well.

47:05All the businesses in my top three generate a significant amount of cash. And when I think about them, they do actually share a few similarities. So I came up with five. So the first one is that they don't pay a regular dividend. Second, they don't meaningfully buy back shares. Third, they consistently invest more and more in growth. Fourth, they don't allow cash to grow excessively. And fifth is that their moats are continuing to expand. Now, these are all characteristics of businesses that can compound value simply because they can reinvest all of their cash flow back into their business at high rates of return.

47:40So while their free cash flow numbers may not look amazing, I'm actually okay with that because they're constantly using that cash to reinvest into their business at very high rates of return. So this is a business model that really attracts me the most. While many value investors are looking for businesses that are growing, you know, maybe in the high single digits or low double digits, they're also accepting that returns are going to come from things like multiple expansion, buybacks, or even dividends. I just prefer to not rely on them as much to give me returns. While I love buying businesses on a cheap multiple, one of the great benefits of compounders is just the steadiness in which they can compound capital.

48:18So for that reason, they tend to carry higher multiples and maintain those higher multiples. As of today, the forward earnings multiple on my top three businesses are 29 times, 41 times, and 90 times. So the third business, which I won't name with the 90 times multiple, is pretty distorted by the fact that it's growing so rapidly, which penalizes it very significantly under IFRS due to significant depreciation and amortization. So the multiple gets cut significantly when I make a lot of adjustments, but it still is a pretty high ratio. So you'll notice that the first four points mean businesses are just optimized for growth.

48:54They aren't trying to grow a steady dividend to draw in capital. They know that the best use for capital is to invest in the businesses that they're already in. The risk of owning businesses like this relates purely to just the future and the unknown. Once the market no longer believes that these businesses will grow at high rates, they will no longer be given a premium multiple. This is my most significant concern. My primary maintenance tasks are basically tracking growth and observing the direction that things are moving. I learned this the hard way with Evolution AB, an iGaming business. So this business was one that I expected to grow, but just failed to meet the market's expectations.

49:34So any business that is expected to grow, but fails to meet the market's expectations is going to experience a pretty big price drop. The key is to just try to stay ahead of the market. Let's suppose that you think a business is in maybe some sort of structural decline. In that case, I'd rather exit early, potentially foregoing profits to avoid the mass exodus that's probably going to follow once it's well established that the business is in a structural decline. So what Sleep and Zakaria really nailed was that the businesses that they chose were just so good that even if they grew at lower rates, they still maintained a reasonable valuation because it was just common knowledge that these businesses had near impenetrable moats and had high, high levels of customer loyalty.

50:15To execute Nomad's strategy on yourself, you must have active patience. I first learned of active patience from Ian Cassell, who wrote, The longer I invest, the more I realize you get one or two great opportunities every few years. The rest of the time is spent wondering if you'll ever get another great opportunity again, and convincing yourself to own mediocre opportunities while you wait. Mediocrity is the price you pay for impatience. Nomad did an exceptional job avoiding impatience and practicing active patience. If you want to learn to improve the skill of active patients, focus on three areas.

50:49So the first area is developing your temperament. This is done by managing your emotions and understanding your default reactions to things like risk, losses, and volatility. By journaling on your decision-making, you can build awareness to help anticipate emotional triggers and respond intelligently rather than relying on things like impulse. Second, find your principles. Clear principles provide a North Star for evaluating opportunities. Create things like a non-negotiable checklist of criteria that you just refuse to deviate from. This helps filter incoming ideas to further help remove mediocrity.

51:23And third is just commit to your principles. Once you know temperament and principles, the hard work really comes in. So the hard work is just staying true to your rules and avoiding the temptation of good enough. You can try to reduce noise by doing things such as improving your investing environment and saying no firmly and often. Monish Pabrai has evolved as an investor very similar to Sleep and Zakaria, moving from cheap cigar butts to businesses that are a little higher up in quality. But I think it's important not to only focus on where investors like Pabrai are today, but also to learn lessons from their experience managing smaller sums of capital.

51:59So let's imagine we're in 2012. Monish Pabrai finds himself in quiet reflection in the evening, scanning financial news, using his usual mild skepticism. But a specific car company gives him a jolt. In Monish's mind, the financial press is sharing fears of the business with headlines such as Fiat Teeters on the Brink of Bankruptcy. Monish gets interested as he checks the price of fiat and sees it trading at the very bottom of the bargain bin. But even though it's cheap, how can a business in just this bad of a financial situation be saved? His answer comes in the form of Sergio Marchione, the man who had saved the company in the first place.

52:35Monish begins conducting his due diligence on the business and his skepticism slowly fades as he learns more and more. Fiat Chrysler has a market cap of$5 billion, but has annual sales of$140 billion, meaning the business was trading at less than 4 % of its revenues. Additionally, the company was still turning a profit, and a very good one at that given its share price. It had$2.22 in EPS and was trading at a price of around$4, meaning it had a PE of around two times. Now, his eyes really began to widen. But Papai does some more digging. He knows not to fall for every business with low single digit P multiples because many of these businesses just don't deserve to be held by an intelligent investor.

53:14Many of these businesses are on life support and aren't worth the hassle of trying to understand any deeper than that. But Fiat Chrysler has an additional asset that the market is overlooking, and that's Ferrari. At this time, Ferrari was a subsidiary of Fiat Chrysler. He decided to deduct 40 % of the 2012 purchase price as a value derived from Ferrari. And this is how he arrives at a PE of only one. From there, the rest is history. It's not publicly disclosed when he sold, but within two years, Fiat Chrysler was trading in the teens and low twenties, meaning there was a multi-bagger from that$4 price point, which he reportedly started buying.

53:49So my main lesson here isn't actually that you have to find businesses that have a PE of one. However, companies where you as an investor can just peer into the future often have valuations that simply do not make any sense. Whether that's a PE of 1, 5, 10, or 20, or whatever number you want to use, there are businesses out there that are just significantly mispriced. The key here is just in finding them. They won't appear on things like traditional screens. And like Pabrai's research into fiat, additional adjustments to a business's financials are required in order to really get a clear picture of that business's intrinsic value.

54:26That's where the opportunity exists in understanding the value of a company offers that is being overlooked by the market. So when examining fiat, it was apparent to Pabrai that the market wasn't properly valuing the golden goose within fiat, specifically in Ferrari. Once a few simple adjustments were made, the core fiat Chrysler business was even cheaper than the market thought. So how can investors use this to their advantage? You can look at a business as the sum of its parts, looking at each segment of a business individually, valuing each, and then adding it all together to come up with a more accurate picture of value.

55:00This is a method that I've used in the past, but haven't always been very successful with. Bosch Health was a business that appeared cheap on a sum of the parts calculation. Still, poor management ultimately just completely derailed the entire hypothesis, and investors just headed for the exit in droves once they realized that management was unlikely to help the market recognize its full value. This experience left a very bad taste in my mouth regarding some of the parts investments. As I evolved, the model still made sense to me, just in a different form. So Monish was looking for a business where the future cash flow of the company provided the margin of safety.

55:35Like I mentioned with the evolution of Ben Graham's margin of safety principle, this was a lesson that really helped me improve my thought process as an investor. Instead of looking at a business as a sum of their assets, use the future earnings or cash flow to help you determine what a business is worth. That would give you a very firm floor on your downside and a nice upside if the business had additional growth levers that it could pull. In this light, if you look far enough into the future, really any business growing at a decent rate becomes a PE of 1. If a business today is trading at a PE of 30 and growing EPS at 25%, then it becomes a PE of 1 in 15 years.

56:11Now, I don't trust myself to assume any business can grow at 10 % for 15 years, let alone 25%. So instead of using the number one, I like to see what I think the multiple will be just a few years down the road based on its current stock price. When I look at a business like Topicus, I think it will grow its owner's earnings by about 30 % a year from now. That means its future price to owner's earnings drops by about 23 % in just a year's time. And if it continues to grow at that high rate for a few more years, the multiple will continue to drop precipitously. And that's my opportunity. Since the market won't allow that number to continue to fall, I make money simply by owning it and letting my conviction and their ability to compound their cash keep me as a shareholder.

56:53And as long as I have conviction that the future cash flow can grow at a given rate, then I have my low PE stock. So instead of looking at a business with a PE as just a single target, I view PE as more of a moving target. And this is how I can justify owning some of the higher price businesses in my portfolio that I believe can continue to grow at rates the market just doesn't expect them to grow at. This method works exceptionally well in some of the smaller businesses I own, which can grow their bottom lines at 30, 50 % or even more in a year. When a company can double its income in a year, the trailing PE shown to the market isn't an accurate reflection of what that business is likely going to be worth in a year's time.

57:31So let's say a business will double its profits in a year, but only has two quarters of profits. So it's trailing 12 month PE may not even exist since the earnings from the last two quarters don't actually cover the losses from the two preceding them. Therefore, many investors will examine these businesses just very briefly, conclude that it's not profitable and move on. However, if you examine the business more closely and determine that it can sustain its momentum in sales and high profit margins, then profits are likely to continue growing into the future. And if future quarters are anything like the previous two, then the business can grow very quickly.

58:04So let me just use a straightforward example here. So let's take a business, we'll call it XYZ. It's grown its revenues at 50 % for the last three years, but is only inflected positively in net income in the previous two quarters. In the last quarter, they had 1.25 million in profit. The business doesn't require any dilutive financing or debt. The company is valued at about$10 million today. So let's assume that they can continue selling while keeping costs controlled. And if we annualize the profits, we arrive at$5 million and the business is trading at a forward PE of only two. Now this happens more regularly than you think.

58:38You just have to be willing to go and look for the opportunity. So finally here, we get to Charlie Munger, the person who may have had the most considerable impact on me, not only in investing, but in life. There are so many lessons I've learned from Charlie, but I've chosen one that I've started really leaning into more and more lately, which is to invest in and surround myself with people who offer win-win outcomes. So I believe this principle is most effective in personal relationships, which I'll discuss further shortly, but it also obviously applies in investing. And the business that Charlie invested in that best exemplifies this is Costco.

59:11So it's hard to find a party that just doesn't win from being part of the Costco ecosystem. The prime parties that come to mind are customers, suppliers, employees, and investors. Let's start here with customers. So what do I get from shopping at Costco. I get things like the lowest prices that I'll find on essential items. I may have to buy larger quantities, but the pricing is just unmatched by most stores because they just can't match Costco's buying power. Costco has also developed deep trust with customers due to their exceptional return policy. I also occasionally enjoy the extra perks such as Costco cookies.

59:48Next up are suppliers. So suppliers gain added stability and reliability from working with Costco, which is a trusted long-term partner in the market. If a business wants to grow and scale, then partnering with Costco is just a great opportunity as it has the ability to put your product in front of many customers and help build your brand. Since Costco has been partnering with suppliers for such a long time, they're also very, very reliable. Now, when we look at employees, employees at Costco are very well taken care of. Since Costco can buy their product for cheaper, it allows it to spend more money elsewhere, such as on its employees.

1:00:22This enables them to pay a above average wages and offer great benefits, extending them to part-time workers as well. They also do a great job of promoting from within. As a result, they have lower turnover rates compared to their competitors and have built a very solid reputation among employees. Lastly, we have investors. This is a pretty easy one. Since Costco's inception as a private business in 1985, the stock has returned nearly 3 ,800 % to shareholders, which is about a 20 % kegger. And the returns just keep on coming. So if you look at the last five years, its kegger has been 25%. The business is resilient through economic cycles and pays a steady and growing dividend.

1:00:59They also have growth opportunities as they expand their store network. So as you can see, Costco is one of those rare businesses that truly creates win-win outcomes across the board. That's why Charlie loved it. Because it's not just profitable, it's fair, durable, and trusted by nearly everyone involved. But here's the thing. While I admire this dynamic in business, I've actually found that principle is even more powerful in life. Businesses may come and go, but the quality of your relationships determines the quality of your life. And just like Costco, the best relationships that I've had are the ones that everyone walks away better off.

1:01:33All my best relationships are with people that I can hopefully try to provide as much value as possible to. But there's no way I can offer the right amount of value to everyone, which is why I think you can only maintain a very limited number of very high quality relationships. However, the key is to ensure that the relationships you do have are mutually beneficial. So what exactly constitutes a win-win relationship? I think it's reciprocity that multiplies. Whenever I try to give value, I often find that I receive it back multiple times over. A hidden benefit of win-win relationships is just the exposure to serendipity.

1:02:07When you have people in your life who want to provide you with value, they often surround themselves with people looking to do the exact same thing. And this allows you to tap into their network, further enhancing the power of win-win relationships. Then, most importantly, I derive most joy from relationships where I'm just excited to be around that person rather than dreading it. Win-win relationships must be nurtured. One thing I've noticed as I've gotten older and taken on more and more family responsibilities is that maintaining relationships is a lot more difficult than when I had fewer responsibilities.

1:02:39Since I have a lot less time, I'd rather eliminate toxic people from my life as my time is precious. Now, by focusing my time and effort on people that really bring me joy, I build a self-reinforcing cycle of support, generosity, and opportunity. When it came to toxic people, Charlie Munger once said, the great lesson of life is to get them the hell out of your life and do it fast. And I think that's very key. I've come to learn that people just tend not to change their mindsets. If people are stuck in an entitlement or scarcity mindset, it's very doubtful that I, or anybody else for that matter, will change their minds on that.

1:03:15So, toxic people have a way of offering win-lose relationships where you put in value and you receive none in return. The simple removal of these relationships is just a massive boost to the quality of your life. Ultimately, a life curated around these win-win relationships is just one that's filled with higher quality interactions, deeper fulfillment, and significantly reduced exposure to negativity. And that, to me, is the essence of the win-win principle. Invest deeply in people and relationships where value flows both ways, and be quick to cut out all the ones that don't. In investing, that might look like Costco.

1:03:50In life, it looks like surrounding yourself with people rooted in trust, generosity, and abundance. In both cases, the rewards compound over time, not only in terms of wealth, but also in terms of happiness and meaning. That's all I have for you today. Want to keep the conversation going? Follow me on Twitter at IrrationalMRKTS or connect with me on LinkedIn. Just search for Kyle Grief. I'm always open to feedback, so feel free to share how I can make this podcast even better for you. Thanks for listening and see you next time. Thank you for listening to TIP. Make sure to follow We Study Billionaires on your favorite podcast app and never miss out on episodes.

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